Expert view: Take a calculated risk with your cash

It is remarkable how many charities are not only content, but apparently determined, to sit on large amounts of cash.

And I do mean cash, not investments. Even when their reserves policies make it clear that some of the funds are not expected to be spent for the foreseeable future, trustees are often wary of doing anything other than leaving all the dosh in the bank, where it can be got at tomorrow. 

<h2>Risky business</h2>

So why are they so cautious? Trustees are rightly urged by the Charity Commission to act prudently when it comes to investments. But many are instinctively averse to any risk-taking. Indeed, trustees are often more risk-averse with their charity's money than they are with their own.

We need to remember there are different types of risk. Too many trustees are concerned only about the risk that the nominal capital value - that is, the number of pounds sterling in their reserves - will drop if they move beyond cash deposits. But by sticking exclusively to cash, they are exposing themselves to at least one other form of risk: inflation.

I'm not going to get into 'institutional risk' - the risk that the bank you deposit with goes under - although recent events at the Northern Rock bank have alerted many trustees to this too.

Some degree of inflation is pretty much a certainty, of course. What we don't know is how high it will be. And many charities are driven by costs that grow largely in line with labour costs, which tend to rise faster than the consumer and retail price indices that grab the headlines.

Even if these trustees reinvest some or all of the interest the cash earns, they are taking a big risk that the real value of their funds will not grow fast enough to support the level of work they plan for the future.

<h2>Manage with care</h2>

Some reserves, however, such as those earmarked for medium-term spending - known cash liabilities - are best kept in forms that carry little or no capital risk. And exposure to the equity markets in particular needs to be managed carefully. Again, my thanks go to recent market events for illustrating this point.

For long-term reserves, though, it usually makes sense to include some long-term investments. That might mean accepting additional forms of risk, but the expected reward comes in the form of higher long-term returns to support your charity's work in the future.

- Heather Lamont is head of charity business development at HSBC  

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